Rio Tinto battered by commodities storm, ditches progressive dividends

Rio Tinto was insistent it was weathering the commodities storm in its full-year results on Thursday, but the numbers were telling a different story - with net earnings down almost £5bn.

In the year to 31 December 2015, the FTSE 100 company reported consolidated sales revenues of $34.8bn (£23.9bn), down 27% or $12.8bn, on the prior year. Rio Tinto blamed the drop on a $13.bn reduction, from the sharp decline in commodity prices.

Its EBITDA margin was 34%, compared with 39% in 2014. Underlying earnings totalled $4.5bn, down 52% ($4.8bn) on a year before.

Rio Tinto said cash cost improvements, higher volumes, lower energy costs, positive currency and other movements totalling $2.9bn had partially offset the $7.7bn post-tax impact of lower prices.

Underlying earnings per share were 248.8 cents, against 503.4 cents in 2014.

The company made a net loss of $866m, reflecting non-cash exchange rate and derivative losses of $3.3bn, and impairment charges of $1.8bn. That compared with net earnings of $6.53bn a year earlier - a reduction of 113%.

Rio Tinto's board said the impairments were primarily related to the Simandou iron ore project, Energy Resources of Australia (ERA) and the Roughrider uranium project.

The group also recognised legacy remediation costs of $200m and general restructuring and headcount reduction costs of $300m.

"We continued to take decisive action [during the year] to preserve cash through further cost reduction, lower capital expenditure and the release of working capital," said chief executive Sam Walsh.

"This focus on cash resulted in operating cash flows of $9.4bn," he added.

At 31 December, the company had net debt of $13.78bn, up from $12.5bn a year earlier, with its gearing ratio increasing to 24% from 19%.

The company's total reported EBITDA was $12.06bn, a 36% decline, just missing forecasts of $12.9bn. Net debt was predicted to jump 18% to $14.8bn on Wednesday.

Chairman Jan du Plessis announced a final dividend of 107.5 cents per share, bringing the 2015 full year dividend to 215 cents per share, which was in line with 2014.

"Over the past five years we have returned more than $25bn to our shareholders, underlining our commitment to shareholder returns," he said.

"However, with the continuing uncertain market outlook, the board believes that maintaining the current progressive dividend policy would constrain the business and act against shareholders' long-term interests," he added.

Du Plessis said the board was replacing the policy with a more flexible approach, to allow returns that better reflected the company's position and outlook.

"For 2016, we intend that the full year dividend will not be less than 110 cents per share," he confirmed.

Looking ahead, Rio Tinto was taking further preemptive action in a bid to maintain its balance sheet, including operating cash cost improvements of $1bn in 2016 and an additional goal of $1bn in 2017.

Capital expenditure was now expected to be around $4bn in 2016, down from previous guidance of $5bn. In 2017 it was reduced to $5bn from $7bn; and in 2018 $5.5bn. Each year included around $2bn of sustaining capital expenditure, the board confirmed.

Rio Tinto was continuing to target a 20% to 30% gearing ratio, and was expecting an underlying effective tax rate of 27% to 30% in 2016.

The board's production guidance remained unchanged from its Fourth Quarter Operations Review.

"The continued deterioration in the macro environment has generated widespread market uncertainty. We are embarking on a new round of proactive measures to cut our operating costs by a further $1bn in 2016 followed by an additional goal of $1bn in 2017," said Walsh.

"We are also reducing our capital expenditure [by] an overall $3bn compared with our previous guidance," he confirmed.

Citi was quick to release its view on the change in dividend policy, saying: "In our view this signals a dramatic change in both the outlook for the company and the industry; it does however align the dividend policy to [the] cash flow of the business".

The bank said the company still needed to realign its strategy to create long-term value. It had spent around $20bn in growth capex in iron ore since 2008, and Citi was forecasting Rio to earn less net profit in that commodity this year than they did in 2006.

"Overall our view is that the market will initially view the change with some skepticism, especially in the UK," Citi concluded.